Tax Policy and the Economy

When the zero lower bound on nominal interest rate binds, monetary policy makers may lack traditional tools to stimulate aggregate demand. We investigate whether “unconventional” fiscal policy, in the form of preannounced consumption tax changes, has the potential to meaningfully shift durables purchases intertemporally and how it is affected by consumer credit. In particular, we test whether car sales react in anticipation of future sales tax changes, leveraging 57 preannounced changes in state sales tax rates from 1999 to 2017. We find evidence for substantial tax elasticities, with car sales rising by more than 8% in the month before a 1% increase in the sales tax rate. Responses are heterogeneous across households and sensitive to supply of credit. Consumers with high credit risk scores are most able to pull purchases forward. At the same time, other effects such as customer composition and attention lead to even greater tax elasticity during recessions, despite these credit frictions. We discuss policy implications and the likely magnitudes of tax changes necessary for any substantive long-term responses.

This paper examines corporations’ actions, and statements about actions, following the tax law change known as the Tax Cuts and Jobs Act of 2017 (TCJA). Specifically, we examine four different outcomes: bonuses (or other actions that benefit workers), announcements of new investments, share repurchases, and dividend announcements. We find that 4% of public firms in our sample announced in the first quarter of 2018 they would pay some portion of their tax savings toward workers. In terms of investment, we find that 22% of the S&P 500 firms in our sample mentioned in earnings conference calls that they would increase investment because of the TCJA. We find a general increase in share repurchases following the passage of the TCJA, but the increase is extremely concentrated in a small number of firms. We find only nine firms that announced a new share repurchase plan explicitly attributed the new plan to the TCJA. In regression analysis, we find that both political and economic variables explain TCJA-linked announcements. The analysis suggests that firms with greater expected tax savings from the TCJA are those most likely to announce payments to workers and plans to increase investment. Firms with a political action committee that donates more to Republican candidates are also more likely to announce benefits to employees.

In economic analyses of the effects of tax policies, one commonly encounters discussions of the equivalence of apparently different policies, where “equivalence” is defined as the policies having the same impact on fundamental economic outcomes. These related tax policies may differ in many respects, including (1) the side of a market on which they are applied, (2) the form in which they are imposed (e.g., as a unit or ad valorem tax, on a tax-inclusive or tax-exclusive basis, etc.), (3) whether they are imposed on households or firms, (4) the market in which they are directly imposed, (5) their timing, and (6) whether behavioral adjustments are involved in the equivalence. These differences give rise to conditions under which the equivalences may break down, because of several factors, including (1) differences in salience; (2) market imperfections, such as liquidity constraints, price rigidity or imperfect competition; (3) differences in information requirements and the costs of tax administration and enforcement; and (4) government accounting rules. This paper draws out the key issues that relate to tax equivalences, using several illustrations from important instances of such equivalences that span different areas of taxation, with many of these illustrations relating to the taxation of capital income. Recognition of equivalences and the ways in which they may fail to hold is important both for positive analysis (e.g., the political reasons for choosing one approach over another) and for normative analysis (to determine which approach may be a more effective way of implementing a policy).

Switching from joint to independent taxation of spouses in married couples would reduce marginal tax rates on secondary earners, make the tax system marriage neutral, and facilitate return-free filing through exact withholding. This switch would, however, abandon the perspective that total household income is the best measure of ability to pay. This paper investigates the vertical and horizontal equity implications of a switch from joint to independent taxation of the sort that might occur in conjunction with adoption of return-free filing. There are two main findings. First, although there are winners and losers from the reform, there are enough free parameters such that it is possible to design an independent taxation system that approximately matches the current distribution of the tax burden by income decile and thus causes little change in vertical equity. Second, because the existing treatment of married couples under the tax code is far from the ideal that would be prescribed based on strict application of utilitarian ability-to-pay principles, the horizontal equity losses under independent taxation from not taking total household resources into account are offset by other horizontal equity gains. In particular, the current system often treats one-earner couples more favorably and two-earner couples less favorably than ability-to-pay considerations would suggest, and independent taxation reduces this inequity. On net, a switch to independent taxation would produce a very small reduction in horizontal equity, a cost that is likely to be outweighed by simplicity and efficiency gains.

Implicit government obligations represent the lion’s share of government liabilities in the United States and many other countries. Yet these liabilities are rarely measured, let alone properly adjusted for their risk. This paper shows, by example, how modern asset pricing can be used to value implicit fiscal debts taking into account their risk properties. The example is the US Social Security system’s net liability to working-age Americans. Marking this debt to market makes a big difference. Based on our preferred estimate, its market value is 86% higher than the Social Security trustees’ valuation method suggests. Our alternative arbitrage pricing theory specifications range from 74% to 115% higher than that of the Social Security Administration.